Introduction to International Financial ManagementPowerPoint Lecture Presentationto accompany International Financial ManagementDr. Samiul Parvez Ahmed, Faculty, Independent University, Bangladesh

DividendRemittance& FinancingExporting& ImportingInvesting& FinancingPart IThe International Financial Environment

Multinational Financial Management:An Overview1 Chapter

Chapter ObjectivesTo identify the main goal of the multinational corporation (MNC) and conflicts with that goal;To describe the key theories that justify international business; andTo explain the common methods used to conduct international business.To provide a model for valuing the MNC

Multinational Corporations (MNCs)MNCs are defined as firms that engage in some form of international business.Their managers conduct international financial management.

Goal of the MNCThe commonly accepted goal of an MNC is to maximize shareholder wealth (measured by share price).Functions of Financial ManagementAcquisition of funds: generating funds (internally or externally) at a lowest possible costInvestment of funds: invest funds in such a way that increases wealth

Conflicts Against the MNC GoalFor corporations with shareholders who differ from their managers, a conflict of goals can exist - the agency problem.Agency costs are normally larger for MNCs than for purely domestic firms.The scattering of distant subsidiariesdifficult to monitorThe culture of foreign managers may be different and they may not follow uniform goalsThe sheer size of the MNC.Subsidiary value (e.g. serve local employees welfare) versus overall MNC value.

Impact of Management ControlThe magnitude of agency costs can vary with the management style of the MNC.A centralized management style reduces agency costs. However, a decentralized style gives more control to those managers who are closer to the subsidiarys operations and environment.

Centralized Multinational Financial Managementfor an MNC with two subsidiaries, A and B

Decentralized Multinational Financial Managementfor an MNC with two subsidiaries, A and B

Impact of Management ControlSome MNCs attempt to strike a balance - they allow subsidiary managers to make the key decisions for their respective operations, but the decisions are monitored by the parents management.

Impact of Management ControlElectronic networks make it easier for the parent to monitor the actions and performance of foreign subsidiaries.For example, corporate intranet or internet email facilitates communication. Financial reports and other documents can be sent electronically too.

Impact of Corporate ControlVarious forms of corporate control can reduce agency costs.Stock compensation (e.g. options to buy stocks) for board members and executives.The threat of a hostile takeovernew shareholders can remove the old managersMonitoring and intervention by large shareholders (e.g. mutual funds or pension funds).

Why are firms motivated to expand their business internationally?Theories of International BusinessTheory of Comparative AdvantageSpecialization by countries can increase production efficiency.E.g. USA and Japan have technological advantages; Bangladesh, India, China have advantage on basic labor costSpecialization and Gains from Tradecountry having comparative advantage in making a good would be able to produce it at a lower (opportunity) cost

Theories of International BusinessImperfect Markets TheoryThe markets for the various resources used in production are imperfect.factors of production are immobile (e.g. labor cannot freely move, land is immobile)Many foreign firms established their production units in countries where the cost of labor and land are cheaper.

Imperfect Markets TheoryArbitrage (due to imperfect market pricing):Traditionally has been defined as the purchase of assets or commodities on one market for immediate resale on another in order to profit from a price discrepancy. In recent years, arbitrage has been used to describe a broader range of activities: tax arbitrage.Theories of International Business

Theories of International BusinessProduct Cycle TheoryAs a firm matures, it may recognize additional opportunities outside its home country.

The International Product Life Cycle

InternationalBusiness MethodsInternational trade is a relatively conservative approach involving exporting and/or importing.The internet facilitates international trade by enabling firms to advertise and manage orders through their websites.There are several methods by which firms can conduct international business.

InternationalBusiness MethodsLicensing allows a firm to provide its technology (e.g. copyrights, patents, trademarks) in exchange for fees or some other benefits. Licensing allows firms to use their technology in foreign markets without major investment in foreign countries.The major disadvantage in licensing is that it is often difficult to control the quality of the product/service. (e.g. American Standard International School in Bangladesh is licensed by American Education Group; this institute can use American curriculums, books teaching methods etc.)

InternationalBusiness MethodsFranchising obligates a firm to provide a specialized sales or service strategy, support assistance, and possibly an initial investment in the franchise in exchange for periodic fees. (e.g. Subway, Nandos).

InternationalBusiness MethodsFirms may also penetrate foreign markets by engaging in a joint venture (joint ownership and operation) with firms that reside in those markets. E.g. GrameenPhone is a joint venture by Telenor (Norway) and Grameen Telecom Corporation.

InternationalBusiness MethodsAcquisitions of existing operations in foreign countries allow firms to quickly gain control over foreign operations as well as a share of the foreign market. Usually, poor performers sell their existing businesses to others. It is relatively (compare to developing own subsidiary) a cheaper option to penetrate foreign market.E.g. Google Inc. acquired business in Australia (search engines), Brazil (search engines), Canada (Mobile Browser), China (search engines) etc.

InternationalBusiness MethodsFirms can also penetrate foreign markets by establishing new foreign subsidiaries. It requires a large investment.

InternationalBusiness MethodsIn general, any method of conducting business that requires a direct investment in foreign operations is referred to as a direct foreign investment (DFI).

Cash Flow Diagram for MNCsCash Inflows Received from selling products

Cash Flow Diagram for MNCsLicensing, Franchising & Joint Ventures

Foreign Firms

Cash outflows for service receivedCash Inflows for service provided

Investment in Foreign Subsidiaries

Foreign Subsidiaries

Cash outflows to provide financing for foreign subsidiariesCash Inflows from remitted earnings

Factors Unique to MNCsExchange rateMultiple inflation ratesInternational differences in tax ratesMultiple money marketsCurrency controlsMultiple political situations

Risks as Advantages!!!Taking advantages by MNCs (Being a large global firm)Ability to mobile people, money and materialAccess segmented capital and money marketsEconomic/political differences---International diversification opportunitiesInformation updates continuously --- in relation to technical/research advancement of its competitorsHigher bargaining power while negotiating with foreign governments---due to its sheer size!!!

Valuation Model for an MNCDomestic Model

Valuation Model for an MNCValuing International Cash Flows

Valuation Model for an MNC

How Chapters Relate to Valuation